Grunberg & Co offers tips to help employees and employers

By Nimesh Patel, Tax Partner at Grunberg & Co

As of April 2022, both employers and employees face a 1.25 percentage point increase in the amount of National Insurance (NI) that they pay.

With many businesses and individuals already facing a cost crisis, driven by higher energy costs, inflation and rising supplier and consumer prices, the increase in National Insurance Contributions (NICs) could have a big impact on the income of individuals and the organisations that employ them.

Unlike some forms of taxation, which have various forms of relief, planning around NICs can be more challenging and businesses and their employees looking to minimise the amount of NI paid need to take innovative approaches to manage how salaries and other employment benefits are received.

What is happening with NICs?

The Government announced a 1.25 percentage point increase in National Insurance contributions (NICs) from April 2022, which will affect employees, employers and the majority of self-employed workers.

The move will help to raise more than £12 billion for the NHS and social care system but it will mean that many individuals and businesses face greater employment costs.

The increase in NICs will initially affect everyone over the age of 16, but below the state pension age, earning more than £184 per week through employment (rising to £190 from April and then £242 from July 2022) or with profits of £9,568 or more a year in self-employment (rising to £9,880 from April and then £12,570 from July 2022).

The 1.25 percentage point increase also applies to employer NICs, minus any reliefs that a business may be entitled to.

The increase will not apply to Class 2 NICs, which is the flat rate paid by the self-employed with profits above the Small Profits Threshold (currently £6,515 per year) or Class 3 NICs, made up of voluntary contributions from taxpayers to fill in gaps in their contributions’ records to qualify for benefits.

Pensions

One way in which both employers and employees can reduce NICs is by increasing the amount of pension contributions taken from salaries.

All pension contributions are tax-free up to the annual allowance of £40,000 for most people and entirely NIC-free.

That means by paying more into a pension you are reducing the amount of earnings that are subject to the higher NIC charge. However, the annual allowance may be lower for higher earners with the minimum annual allowance falling as low as £4,000.

For employees dealing with the cost-of-living crisis, this may seem like a tough sacrifice to make, but with careful planning, it should be possible to find a balance that reduces NICs, boosts pensions and still provides sufficient ‘take home’ pay.

Pension income is also not subject to National Insurance Contributions, so those still working who are already in receipt of a pension won’t be penalised for their combined income but could continue contributing to the same or another pension.

Be aware, from April 2023 the Health and Social Care Levy will formalise the new rules and will require individuals working above the State Pension age to contribute as well. Currently, this group are not required to pay any NICs.

Dividends 

A balanced pay strategy could be critical to reducing the amount of NICs paid. By shifting how you receive your income from a salary to dividends could offer potential savings to the shareholders of owner-managed businesses.

Dividends are paid out of a company’s profits to its shareholders and every individual also benefits from a £2,000 tax-free allowance for dividend income,

Any dividends over this amount will currently be taxed at different amounts depending on a person’s marginal rate as follows:

• Basic-rate taxpayers pay 7.5 per cent on dividends.
• Higher-rate taxpayers pay 32.5 per cent on dividends.
• Additional-rate taxpayers pay 38.1 per cent on dividends.

You should be aware that from April 2022 these rates will also increase by 1.25 percentage points. The new rates from this date are as follows:

• Basic rate – pay 8.75 per cent
• Higher rate – 33.75 per cent
• Additional rate – 39.35 per cent

From an employer’s NIC perspective, paying out more in dividends, which are free of NICs, may make more sense given the upcoming changes, but shareholding employees in receipt of dividends may not be as keen given how the upcoming changes could affect their income tax bill.

If it is decided to increase dividend payments care needs to be taken, as a reduction in the NICs paid by an employee could affect their state pension eligibility and payments in future.

Electric cars 

Perhaps one of the most overlooked areas of tax and NIC planning is the benefits on offer from electric cars, both for businesses and their employees.

While many owners of electric company cars may have chosen to go green to reduce their impact on the environment or running costs, these vehicles can have a big impact on the amount of tax and NIC that is due.

The provision of a fully electric car to an employee or director results in a much lower amount of income tax and national insurance compared with the company using the money to pay higher salaries.

This could be achieved through the use of a salary sacrifice arrangement which enables an employee to exchange part of their salary for a non-cash benefit.

A one per cent rate is applied to the list price plus any optional extras to work out the amount of taxable benefit in kind for all fully electric vehicles (this increases to two per cent from this April).

Recent figures from car leasing specialists Arval shows that for a £40,000 internal combustion engine car, the monthly increase in employers’ NI paid on benefit-in-kind (BIK) taxation will be £11.67, whereas for a £45,000 petrol hybrid electric vehicle (PHEV), it will be £5.62, and for a £50,000 electric vehicle (EV), just £1.04.

Where the company buys the car, 100 per cent capital allowances can be claimed which helps to reduce the company’s corporation tax bill.

Another effective strategy could see a company’s profits used to provide electric cars, rather than paying dividends, as this would result in much less income tax than a dividend thus mitigating the 1.25 percentage point increase in dividend tax from April 2022 as well.

It’s not hard to see why many fleet operators are starting to invest significantly in electric vehicles given the tax and NIC benefits on offer.

Seek help

With the rise in NICs and dividend tax just around the corner, now is a great time to speak with a tax adviser about steps you and your company can take to reduce the amount you pay each year.

The increase in NI is here to stay, as part of the Health and Social Care Levy, so careful planning will be essential each year to make the best use of the opportunities on offer.

To find out how Grunberg & Co can assist you with tax planning, please contact Nimesh Patel by calling 020 8458 0083 or emailing nimeshp@grunberg.je-hosting.co.uk